For now it was just Jan Hatzius calling for QE3 now if not sooner. With the addition of JPM to the list of banks now implicitly expecting (read demanding) QE3, it is now quite clear how Wall Street feels - after all someone has to pay those Wall Street bonuses - it sure won't come from M&A activity, underwriting of Chinese IPO frauds, or trading volume. Here is the key sentence from a just released note by JPM's Michael Feroli: "We believe the minutes lend themselves to our view that there is a somewhat better-than-even chance the Fed takes action at the next meeting to increase the average maturity of assets on their balance sheet." Keep an eye on the market tomorrow for confirmation: a third day of the same low volume meltup we have seen this week should make the open QE3 question into case closed.
Sometimes the squeaky wheel doesn't get the oil
The hawks on the FOMC may generate a fair amount of media attention, but today's minutes to the August 9th meeting remind us that there is a less vocal dovish faction that favors even more aggressive policy easing, and their view has been winning out over time. This contingent of "a few" favored a "more substantial move" at the recent FOMC meeting, "but they were willing to accept" the mid-2013 rate guidance "as a step in the direction of additional accommodation." While the change to forward guidance was one such step, other steps discussed included the usual three: further enhancements to forward guidance, further asset purchases, and lowering the interest on excess reserve rate. Inflation targeting, price level targeting, and other more extreme measures were not discussed. We believe the minutes lend themselves to our view that there is a somewhat better-than-even chance the Fed takes action at the next meeting to increase the average maturity of assets on their balance sheet.
Regarding enhanced communications, there was a relatively lengthy discussion of conditioning the fed funds rate guidance on explicit numerical values for the unemployment rate or the inflation rate. A similar policy was undertaken by the BoJ several years back, when they conditioned the continuance of zero interest rate policy (ZIRP) on inflation remaining negative. While some on the FOMC argued in favor of this strategy, the only downside that was mentioned in the minutes was "questions about how an appropriate numerical value might be chosen." Given the Committee added a day to the next meeting to discuss easing options, some further communications enhancement at the next meeting cannot be ruled out.
On balance sheet policy, "some participants noted that additional asset purchases could be used to provide more accommodation." The minutes then went on to note that "others" favored an Operation Twist, perhaps of the active version, to extend the maturity of the Fed's assets holdings by actively selling short maturity assets from the Fed's balance sheet and buying more longer maturity assets. It was noted that this "would have a similar effect" on long term rates as more outright purchases, but would "not boost the size of the Federal Reserve's balance sheet and the quantity of reserve balances." It was not explicitly spelled out why either of these latter two variables should matter, but reading between the lines it could be the case that concern about the adverse political and public reaction to an increase in the monetary base may be leaving Fed policymakers hesitant to undertake another large expansion of the balance sheet. The discussion on lowering IOER was very terse, as "a few participants noted" that it could be "helpful in easing financial conditions."
Stepping away from the discussion of policy options, the Committee's discussion of current conditions and the economic outlook was an exercise in dreariness. The economy's performance so far "was considerably slower than they had expected," uncertainty has "risen appreciably," and "most participants saw increased downside risks to the outlook for economic growth."